Developers dodge blow with FHA

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Last week, developers across the city dodged what could have been a lethal blow when federal authorities decided against tightening a loan program that has become a lifeline for many of them.

For months, it had been feared that the U.S. Department of Housing and Urban Development would impose new restrictions on its popular Federal Home Administration loan insurance program, which allows apartment buyers to pony up as little as 3.5% of the price of their purchase in cash and still qualify for a federally backed loan.

“We were anticipating the worst,” says Ross Weinstein, a managing partner at Union Square Mortgage Group. “It is not as bad as we thought it was going to be.”

Pressure to take action

In the end, HUD actually opted to loosen a restriction on the percentage of units in a given building that can be bought with FHA-insured mortgages. New guidelines cap that percentage at 50%, up from 30%.

Pressure had been mounting on the FHA to take action as its loan losses have ballooned and it is in danger of depleting its cash reserves. Those reserves fell to 0.43% of its total portfolio as of June 30, a fraction of the 2% mandated by Congress.

Critics have complained that it is absurd for the federal government to be insuring loans for 96.5% of the value of an apartment in a market where prices are falling and where virtually all other lenders—including government-owned Fannie Mae and Freddie Mac—have hugely tightened standards. Burned by their own losses, many of those lenders have cut the amount they will finance to as little as 50% of the value of a home.

By limiting the proportion of units it will help finance in a building to half, the FHA has modestly eased its defenses against overexposure to a single building. But looks can be deceiving. The fact is that the new rule allows for some significant exceptions. For instance, a new development that remains unsold for more than a year may be allowed to take advantage of FHA-backed loans for the entire development.

CHA-CHING

96.5%

SHARE of purchase FHA is willing to insure

Crucial to market

In addition, the agency actually loosened its standards on another front. Effective Dec. 7, buyers can obtain an FHA-backed loan at approved condominium buildings that are 30% presold. Previously, FHA loans were only available to buyers at developments that were 50% presold.

The news could hardly have been better for the owners of the 86 condo buildings in the city that have been approved for the FHA program. A majority of those buildings are in Brooklyn and Queens, with just 15 in Manhattan. Developers must apply to HUD for acceptance into the program.

FHA loan insurance has become crucial in the New York market as many lenders have pulled back following the credit crisis that exploded in September 2008. In fact, prior to last year, Executive Vice President Richard Martin of Stanley Capital, a mortgage company, had never worked on an FHA-insured loan.

Many avoided it because of the extensive paperwork involved, and also because of a relatively low maximum loan size of $729,000. In Manhattan, where the median price of a one-bedroom condo even today is $710,000, most buildings don't qualify for the program. But for less expensive new developments in Harlem and neighborhoods like Long Island City, Queens, and Williamsburg in Brooklyn, the program has become critical.

Up from obscurity

“If you asked me about FHA a few years ago, I would have looked at you funny,” says David Kramer, principal of the Hudson Cos., the developer of Third + Bond, an FHA-approved new development in Carroll Gardens, Brooklyn. “Now we have gotten involved in making sure that as many financing options as possible are available for buyers, and that is where FHA comes into play.”

Developer Jamie Wiseman signed up with the program for the first time in August to help boost sales in his 15-unit condo at 38 Wilson Ave. in Bushwick, Brooklyn. Since then, 11 units have gone to contract, four of which have closed, with another four scheduled to close in a few weeks. “The FHA loans helped us get buyers who had less cash and wouldn't be able to buy otherwise,” he says.

Riverwalk Court on Roosevelt Island, a 123-unit luxury condo that Hudson co-developed with the Related Companies, received FHA approval in July. The development is 60% sold, says Mr. Kramer, who attributes sales to the program.

No wonder Mr. Weinstein reports that he is working with owners of another 20 buildings in Brooklyn and Manhattan, helping them get into the FHA program.

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